AAE 130 (Unit I) Agricultural Finance PDF

UNIT I: Introduction to Agricultural Finance AAE 130 – Agricultural Finance Prepared by: Asst. Prof. Christian Paul L. Fang DAAE-CEM-UPLB  Learning Objectives After studying this module, you should be able to: 1. discuss the scope and nature of agricultural finance; 2. diff...

UNIT I: Introduction to Agricultural Finance AAE 130 – Agricultural Finance Prepared by: Asst. Prof. Christian Paul L. Fang DAAE-CEM-UPLB  Learning Objectives After studying this module, you should be able to: 1. discuss the scope and nature of agricultural finance; 2. differentiate agricultural finance, rural finance, and microfinance; and 3. understand the issues and challenges of agricultural finance.  Scope of Agricultural Finance Finance is the art and science of managing money. It is concerned with the process, institutions, markets, and instruments involved in the transfer of money among individuals, businesses, and governments (Gitman, 2009). Financial services is the area of finance concerned with the design and delivery of advice and financial products to individuals, businesses, and governments (Gitman, 2009). This constitutes tangible (e.g., money, goods used as payments) and intangible (e.g., financial advice, services like online payments and money transfers) products.  Scope of Agricultural Finance Agricultural finance, as a field of study, refers to the study of the management and provision of financial resources to the agriculture sector. It also pertains to the array of financial services provided and utilized in the sector. It is used to finance agriculture-related activities such as input supply, production, distribution, wholesale, processing, and marketing.  Scope of Agricultural Finance Subsectors of Philippine Agriculture ü Crops ü Farm inputs ü Livestock ü Processed food products ü Poultry ü Non-food agri-based products ü Fisheries ü Agricultural services ü Agro-forestry  Scope of Agricultural Finance Credit is defined as the ability of an individual to obtain goods, services, or money at the present time in exchange for a promise to pay at a definite future time. It also refers to loans granted by financial institutions to borrowers who pay credit in the form of goods, services, or money. Agricultural credit takes the form of cash or in kind (goods, services). This is the most availed and utilized financial service.  Scope of Agricultural Finance Rural finance encompasses the range of financial services offered and used in rural areas by people (heterogeneous rural farm and non-farm population) of all income levels. As a field of work, it enables access of farmers and all related enterprises to efficient and sustainable financial services which can promote agricultural and economic development.  Scope of Agricultural Finance Are all transactions in rural finance agricultural? ü “No. There are non-agricultural enterprises that operate in rural economies, and their need for financial services is provided through rural financing, and not agricultural financing.”  Scope of Agricultural Finance Is agricultural finance merely a subset of rural finance? ü “No. While a large part of agricultural finance is a subset of rural finance since agricultural activities predominantly occur in rural areas, there is still a portion of agricultural finance that is outside the subset of rural finance (i.e., urban farming/agriculture and food processing and manufacturing situated in urban areas).”  Scope of Agricultural Finance Microfinance includes the range of financial services offered to and utilized by individuals or groups who belong to the low-income level in both rural and urban areas. Various studies have defined the income levels catered by microfinance, namely poor, low, and middle.  Scope of Agricultural Finance Does microfinance have an agricultural finance component? ü “Yes. Microfinance services can be extended to the poor and low- income households engaged in agricultural activities.” Does microfinance have a rural finance component? ü “Yes. Microfinance services are offered to the poor and low- income households in the rural sector, including those outside the agriculture sector.”  Scope of Agricultural Finance Microfinance includes the range of financial services offered to and utilized by individuals or groups who belong to the low-income level in both rural and urban areas. Various studies have defined the income levels catered by microfinance, namely poor, low, and middle. Household consumption is financed by rural finance or microfinance.  Venn Diagram: Agricultural Finance, Rural Finance, and Microfinance (August 29) Agricultural Finance i ces l Serv i a anc Rural Finance Fin Microfinance Agricultural Credit Finance (Universal Set)  Nature of Agricultural Finance Most formal institutions are more selective in accepting borrowers from the agriculture sector due to the relatively higher risks, uncertainties and transaction costs involved in lending to small farmers and fisherfolk (Llanto, 2005). Loans provided by informal sources, despite being generally more expensive than those offered by formal sources, are more preferred due to its availability, accessibility, timeliness, and more relaxed requirements (Llanto, 2005). Source: Cuevas and Sumalde (2014)  Nature of Agricultural Finance More informal financial institutions accept collateral substitutes (e.g., cultivation or usufruct rights, credit marketing tie-up, third-party guarantee) than formal credit sources. Loans granted by banks to the agriculture sector remains relatively low. Nature of Agricultural Finance Loans for Agriculture Source: DA-ACPC (2020) Issues and Challenges in Agricultural Finance Higher bank density ratio in NCR compared to other regions Banks’ Presence in Rural and Agricultural Areas Source: DA-ACPC (2020) Issues and Challenges in Agricultural Finance Higher bank density ratio in NCR compared to other regions Unbanked Municipalities Source: DA-ACPC (2020) Issues and Challenges in Agricultural Finance Despite the loan quota under the Agri-Agra Law, agriculture remains the least priority sector of commercial lenders. Banks’ Agri-Agra Loans in Compliance with R.A. 10000 Source: DA-ACPC (2020) Issues and Challenges in Agricultural Finance Despite the loan quota under the Agri-Agra Law, agriculture remains the least priority sector of commercial lenders. üBanks comply with the law by way of direct and/or alternative forms. Direct compliance is through actual extension of loans to eligible borrowers for purposes of financing agriculture and agrarian reform activities and purchase of such eligible loans. Alternative compliance, on the other hand, includes investments in: (a) eligible debt securities such as bonds issued by the Development Bank of the Philippines and Land Bank of the Philippines, and other debt securities certified eligible by the Department of Agriculture; and (b) paid subscription of shares of stocks in accredited rural financial institutions or the Philippine Crop Insurance Corporation (PCIC). Issues and Challenges in Agricultural Finance Banks’ Agri-Agra Loans in Compliance with R.A. 10000 Source: DA-ACPC (2020) Issues and Challenges in Agricultural Finance Philippine agriculture is not production-credit constrained but investment-credit constrained. Access to financing is easier for traditional annual crops such as rice and corn but perhaps, near to impossible for long-gestating crops (e.g., palm oil, rubber). High transaction costs of small farmer loans discourage bank lending. Informal moneylenders operate on a very limited supply of funds, which is not sufficient to service a large number of borrowers. Issues and Challenges in Agricultural Finance Fungibility of credit explains why agricultural output has not increased despite the abundance of cheap credit. Inefficiencies brought by some government interventions  Issues and Challenges in Agricultural Finance Directed credit programs à credit programs that are directed to a specific sector for a specific purpose, with funds coming from the financial resources of the government that are either budgetary allocations, internal agency funds, or grants or loan proceeds from donor organizations, to promote agricultural development. The supply-led approach of DCPs in the 1970s to the mid-1980s was unsustainable and had limited success due to poor loan repayment, failure to reach intended beneficiaries, and overdependence resulting in high cost to the government (BSP, 2013). Default problems à disqualifications of borrowers and rural banks à decline in the flow of credit and the weak performance of the rural banks à termination of many subsidized lending programs such as the Masagana 99, Masaganang Maisan, and Gulayan sa Kalusugan, to name a few. End of Unit 1. J